MARKET WRAPS

Stocks:

European stocks edged higher on Wednesday, as investors looked ahead to the Federal Reserve's rate decision.

A 25 basis point interest-rate hike is widely anticipated, even as the futures market has lowered the chance to 86% from 95%, Deutsche Bank said.

"But assuming the hike happens as expected, the bigger question will be what Powell and the FOMC might signal moving forward, not least since market pricing is currently suggesting today will be the last move in the current hiking cycle," Deutsche Bank said.

Muzinich & Co. said the question is whether the Fed has enough conviction on inflation to pause interest-rate rises.

Stocks to Watch

HSBC's stars are more clearly aligned than before, Berenberg said after the bank published strong activity in its first-quarter results.

The lender's structural strength was previously eclipsed by cyclical headwinds and uncertainty related to its restructuring but higher interest rates have recently supported its returns, it added. Restructuring risks are now modest.

"Strengthening activity, particularly in Asia, provides further cyclical support, and growth can be supported further by the bank's recent investments."

HSBC's returns and growth are undervalued, Berenberg noted.

Berenberg raised its rating on the bank's stock to buy from hold.

Economic Insight

The European Central Bank will still have to make some uncomfortable interest-rate decisions, Ethenea Independent Investors said, expecting a 50 basis point interest-rate rise on Thursday.

While eurozone core inflation eased to 5.6% in April from 5.7% in March, the potential for further declines is limited, the asset manager said.

"This should be a clear warning for the central bank that the fight against inflation is far from won."

Ethenea added it sees room for the deposit rate--which is currently 3.00%--to go up to at least 4% by the summer break.

Read ECB Expected to Deliver 25 Basis-Point Rate Rise This Week, With More to Come

U.S. Markets:

Stock futures inched higher as focus turned to the Fed. Officials will be deliberating whether policy is tight enough to merit a pause, after the fastest series of rate rises in 40 years.

Derivatives markets are priced for a pivot. Fed-funds futures imply the Fed will raise rates by a quarter-point to between 5% and 5.25%, and bets are building that officials will begin cutting rates in the months ahead as the economy weakens.

Stocks to Watch

Chegg shares recovered slightly, rising 6% premarket. Its stock had fallen almost by half Tuesday following a warning that ChatGPT was eating into growth.

PacWest, Western Alliance shares traded lower premarket. The drops followed big declines Tuesday that reflected investor concerns about the future of regional banks.

Starbucks fell nearly 5% premarket. It reported a big quarterly profit increase but CEO Narasimhan said the business environment remains challenging.

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Earnings are expected from Kraft Heinz, CVS Health, Estee Lauder, and Paramount Global.

Economic updates set for release include the ADP private sector employment report for April; the S&P services purchasing managers index for April; and the April ISM services report.

Forex:

BBVA said the euro's appreciation against the dollar--rising to around 1.10 from below parity over the past six months--was expected, but has come sooner than anticipated.

The driving factors include: the European economy seems to be overcoming the impact of the energy shock caused by the war in Ukraine; the narrowing spread between German Bund and Treasury yields, "reflecting how the market is adjusting to the growth outlook in Europe; and the slower momentum" of Fed interest rate hikes.

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Sterling will be entirely driven by external factors this week given a lack of U.K.-specific catalysts, ING said.

The Fed's policy decision may not have a sizeable impact on GBP/USD, it said.

However, EUR/GBP faces "downside risks" later this week--potentially falling to 0.8750-0.8780--as the European Central Bank's meeting on Thursday may fall short of the market's "hawkish" pricing for further rate rises in the eurozone, ING added.

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The dollar was weaker, as investors await the latest Fed decision, with the focus on whether the central bank keeps the door open to another rate increase or indicates a pause in June, RBC said.

"In the statement, the key factor to watch is whether the line 'some additional policy firming may be appropriate' is altered or removed altogether - no change would be read as hawkish."

Bonds:

Eurozone government bond yields were barely changed ahead of the Fed's rate decision.

"Bunds are likely to continue to respond to changes in Fed pricing but with a reduced beta to US Treasuries as ECB pricing likely remains sticky to the downside around 3.75%...with core inflation still strong," Citi said.

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German Bund and U.S. Treas ury yields have been moving down decisively for some time now and this pattern should continue, especially if there is a slowdown in economic momentum, Vontobel said.

With the end of central banks' interest-rate rises approaching, allocations to fixed income assets have been increasing significantly, it added.

"This is helpful defense as lower government benchmark yields would offset any eventual widening in credit spreads ."

But it remains to be seen what sort of a slowdown in growth momentum materializes, Vontobel said.

Energy:

Oil prices extended their retreat, as continued worries about the health of U.S. banks have revived concerns about the economy.

"There is little in the way of fresh fundamentals to justify the selloff, though investors seem to be getting increasingly nervous about the macro outlook and its implications for oil demand," ING said.

Metals:

Base metals were slightly lower in London trade, with gold up a touch, with analysts saying Jerome Powell's comments will be crucial as to whether he signals if the Fed will tighten further to fight inflation, despite ongoing banking sector stresses.

DOW JONES NEWSPLUS


EMEA HEADLINES

European Economies Are Finding New Ways to Pay for War on Their Doorstep

COPENHAGEN-Denmark, a founding member of NATO, has no artillery, submarines or air-defense system. The small Nordic nation didn't think it needed them because a ground war in Europe seemed far-fetched-until Russia's invasion of Ukraine.

The conflict in its neighborhood has set it and similar European nations scrambling to plug gaps in their armory. Denmark, one of the richest nations per capita in the Western world, has pledged to boost military spending from about 1.4% of gross domestic product to the North Atlantic Treaty Organization's target of 2% by 2030.


Lufthansa Backs Guidance Ahead of Summer Travel Surge

Deutsche Lufthansa confirmed its forecasts for the year as it expects a strong summer travel season after booking higher revenue and narrower losses for the first quarter.

The German carrier group on Wednesday posted revenue of 7.02 billion euros ($7.72 billion) for the three months to the end of March, up 40% on year thanks to strong bookings for the summer months in a sign of pent-up demand after travel restrictions and border closures that brought international traffic to a near standstill at the height of the Covid-19 pandemic.


Stellantis Confirms 2023 Guidance After First-Quarter Revenue Jump

Stellantis on Wednesday confirmed its 2023 guidance after reporting a rise in revenue on more shipments and higher net pricing for the first quarter.

The Netherlands-based maker of Jeep, Dodge, Peugeot and other brands recorded 47.2 billion euros ($51.92 billion) in sales, up 14% over the first quarter of 2022.


BNP Paribas's First-Quarter Earnings Rose, Helped by Bank of the West Sale

BNP Paribas said Wednesday that first-quarter revenue and earnings rose, helped by growth in all divisions and by the sale of Bank of the West.

The French lender said its net profit climbed to 4.43 billion euros ($4.87 billion), compared with EUR1.84 billion in the first quarter of 2022, on revenue that grew 1.4% to EUR12.03 billion.


UniCredit Raises 2023 Outlook as 1Q Earnings Rose

UniCredit on Wednesday said that it upgraded its 2023 outlook as its revenue and earnings rose in the first quarter helped by net interest income growth.

The Italian bank posted a quarterly net profit of 2.06 billion euros ($2.27 billion), compared with EUR247 million a year ago when its earnings were affected by Russia-related loan-loss provisions.


Lloyds Banking Backs 2023 Guidance After 1Q Pretax Profit Beat

Lloyds Banking Group PLC on Wednesday maintained its full-year guidance as it posted better-than-expected pretax profit for its first quarter on strong net income and capital generation.

The U.K. lender posted a pretax profit of 2.26 billion pounds ($2.82 billion) for the three months to March 31, compared with GBP1.54 billion for the same period a year earlier. It beat expectations taken from a company-compiled consensus that had estimated GBP1.95 billion.


Haleon 1Q Pretax Profit Rose, Says Performance Was Strong Across All Categories

Haleon said Wednesday that pretax profit for the first quarter of 2023 has increased on the back of a robust performance across all categories and areas.

The consumer-healthcare business, which was spun out of GSK and is partly owned by Pfizer, reported a pretax profit for the quarter of 542 million pounds ($675.7 million) from the GBP465 million reported the same period a year ago.


Deutsche Post Backs 2023 Outlook After Falls in 1Q Earnings, Revenue

DHL owner Deutsche Post on Wednesday confirmed its 2023 outlook after it said a global economic slowdown weighed on its first-quarter performance, with earnings and revenue lower than in the year-earlier period but ahead of consensus views.

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05-03-23 0618ET